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Holding Period Discounts

FAS Solutions offers expertise in designing equity awards with post-vest holding periods and calculating the corresponding discounts for our clients.  Our approach using option-based methods and restricted stock database methods is 100% supportable and auditable.

Increasingly, companies are issuing equity awards in the form of restricted stock or restricted share units with post-vest holding periods.  Vesting periods contribute to executive retention.  Mandatory post-vest holding periods of typically one to two years after vesting contribute to maintaining share ownership after vest whether the executive remains at the company or not.  Share ownership on the part of executives is considered a positive for shareholders generally even if it’s contractually mandatory.  If the executive remains at the company, then the period during which performance continues to be aligned with shareholders is extended beyond vest.  On the other hand if the executive leaves, holding periods slow down the velocity of selling.

Another benefit of mandatory post-vest holding periods is the fair value discount from the point of view of the executive.  The accounting and proxy disclosure rules permit companies to recognize the discount for lack of marketability (“DLOM”) associated with post-vest holding periods on the P&L and proxy.  Consequently, if the company uses a budget-based or value-based approach to its grants, executives receive more shares or units than would be the case without a holding period discount.

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